Capital Flows Volatility and the Macroeconomic Performance – Evidence from Emerging and Developing Economies

Abstract

Volatile capital flows pose serious risks to economic growth and financial stability. This paper investigates the link between economic per­formance and gross capital flows volatility in emerging market and devel­oping economies (EMDE), and specifically, the extent to which macropru­dential policy measures can diminish the detrimental effects of capital flows volatility on growth. For that purpose, we start by constructing volatility es­timates for gross capital flows and their subcomponents on a sample of 37 EMDEs, following the methodology by Wang (2019). Then we perform pan­el regression over the period 2000-2018 incorporating the main variables of interest: economic growth, gross capital inflows volatility and macropru­dential policy. The results show that the negative effect of gross capital in­flows volatility on growth is significantly mitigated by the implementation of macroprudential policy measures. The results are robust against reverse causality and omitted variables bias.